The recent enactment of Senate Bill 392 in California authorizes the Contractors State License Board (CSLB) to issue contractors licenses to limited liability companies effective no later than January 1, 2012. The passing of this law is a big stride for some contractors working in the state, however the legislation does require them to meet hefty surety bond and liability insurance requirements before they can become licensed.
Limited liability company fundamentals
- A limited liability company is essentially a business that blends partnerships with corporate sponsors, thus holding the actual owner accountable for limited liabilities only. Smaller enterprises typically operate as LLCs because there is a owner’s personal property and finances face a much smaller risk in regard to potential business liabilities. Maintaining a business as an LLC does not necessarily protect the owner from all personal liability claims, however.
- A 2005 study of the surety bond industry called “Surety Credit Survey” revealed that sureties consider LLCs among the most appealing, fiscally responsible contractors because their available tax strategies give owners more freedom to remove equity from the company.
- Previous state laws kept from contractors working as limited liability companies in California. Under a previous law (the Contractors State License Law) the CSLB was only authorized to issue business licenses to contractors whose businesses operated under individual owners, partnerships, and corporations. SB 392 gives the CSLB the ability to license contractors working as limited liability companies as well.
Getting a contractors license as an LLC in California
Before receiving a license, the limited liability company must provide proof of two assets:
- liability insurance worth $1,000,000 to $5,000,000 (depending on the number of employees that work for the company)
- a $100,000 surety bond (in addition to the $12,500 bond already required of all contractor licensees in the state)
The bill mandates the CSLB to begin processing LLC contractors license applications by January 1, 2012, although some stakeholders are urging for an earlier deadline due to the potential economic impact. The state’s Franchise Tax Board estimates that the bill will produce an additional $8.4 million for the state’s revenue.
Getting a surety bond as an LLC contractor in California
Getting a surety bond as an LLC does not protect your assets as some professionals might assume. The surety bond will essentially hold an LLC contractor accountable for any errors he may make in regard to his professional work. According to the language found in SB 392, the $100,000 surety bond requirement was established to benefit “workers relative to payment of wages and fringe benefits will ensure that workers are protected despite the absence of case law dealing with limited liability companies.” Thus, the surety bond will essentially protect the employees of the limited liability company.
When applying for a California contractor bond as an LLC, you’ll need to have the financial records of all owners/managers on hand. You may also need to include a copy of your business’s articles of organization/incorporation to help validate the legitimacy of your enterprise to your surety provider. When submitting the actual surety bond you will need to list the true full name of the limited liability partnership/company as well as any “doing business as” name(s), as government agencies reject surety bonds with inaccurate principal designations.